A defining feature of India’s economy has just fallen prey to the beauty of GST

All that is solid melts into air, all that is holy is profaned, and man is at last compelled to face with sober senses his real conditions of life, and his relations with his kind. Those famous words were not, of course, intended as a description of the impact of the goods and services tax (GST) on India’s unorganised sector.

But they would do just as well. GST will put paid to India’s informal sector, drawing most of it into the formal universe and killing off much of what is left behind. This change will erode the flexibility the economy derives from informality and has serious implications for India’s political economy.

As Sure as Death
Not paying taxes is the holy creed of the unorganised sector, although paying off the rare taxman or the more frequent inspector of labour/factories is accepted as part of the real conditions of life. The small producer supplies parts to other small producers, finished goods for export and to distributors for sale to consumers and parts and services to large firms.

Small producer provide big credit to large producers, by way of accepting delayed payment for his supplies. He pays minimal wages to employees, makes prompt payment to his own suppliers, pays protection money to the local neta-babu-police nexus and exorbitant rate of interest to those who lend him his working capital in a hardscrabble world where banks and their loans linked to the policy rate set by the Reserve Bank of India are the stuff of dreams and fairy tales.

Fierce competition with others of their ilk does not leave them the luxury of paying taxes or honestly for the power they consume. More than 90 per cent of India’s workers find employment in the unorganised sector. The Central Statistics Office defines the organised sector in manufacturing as enterprises that employ 10 or more workers, if the enterprise uses power, or 20 or more workers, without use of electricity. The rest are unorganised, naturally.

The National Commission for Enterprises in the Unorganised Sector defined the unorganised sector as the totality of all unincorporated suppliers of goods or services with less than 10 total workers.

These definitions matter less than the sector’s role in cushioning the impact of regulation on the economy.

Large companies can sidestep laws on minimum wage and working conditions by outsourcing much of the work to small informal firms beyond the scrutiny of the state.

A garment maker, for example, can be fully compliant with all laws by limiting its direct workforce to a small team that designs clothes, specifies the fabric and the time schedule, and performs quality control on what is delivered by tailors and seamstresses toiling away in much smaller units or even at home, located in the informal universe.

If the garment maker grows bigger and starts supplying to global buyers whose customers are squeamish about wearing stuff made by child labour or in hazardous conditions, they then start worrying about fixed-term contracts and labour flexibility — while also renting large spaces to house the workers.

Contract workers have replaced regular workers in routine jobs such as cleaning, maintenance and running small errands in most offices. Guards are almost entirely sourced from contractors. These contract workers are on the rolls of informal sector firms that pay them a pittance, whatever they receive for their services from the organised sector businesses that buy those services.

Contagious Transparency
What the big companies that deploy contract workers gain is not so much any saving on cost — they pay all the statutory dues, albeit to the labour supplier — as freedom from carrying on its rolls a large workforce with agrowing wage bill.

The informal sector, in other words, is a source of flexibility that the hypocrisy of first-rate labour standards in a combination of third-rate capacity to enforce norms and a bounty of unskilled manpower denies Indian producers.

It also serves as a sink for underemployed labour, refuge for the struggling self-employed and transit home for tiny hobby-horses of daring villagers progressing to urbanising and modernising nodes of a global division of labour.

The defining feature of the informal economy is its inscrutability, that it is beyond official ken. GST is poised to rip apart that concealing veil. In the GST regime, there is a compulsion for all units to be registered with the GST Network and to file returns and upload invoices. If they do not, no one will buy from them.

A bank branch that used to buy its copier paper from a stationer’s next door will shun him now, unless he can provide an invoice with GST — the bank needs it to claim input tax credit. The stationer, small as he is, would source his paper from someone who, in turn, would give him an invoice with GST, to reduce his tax outgo. This is the beauty of the tax: it has a built-in incentive to comply.

Compliance with GST means revealing input purchases and sales. That reveals income as well, to the beady eyes of the taxman, who could then open up claimed expenses and verify them. If the GST-paying small producer shows huge interest expenses, the audit trail would lead to the lender, often a member of the neta-babu tribe, and his sources of income. Informality, RIP